Ex-Bridgewater Analyst Wang Starts No-Fee Hedge Fund

Convoy Investments co-Founder Howard Wang worked for $160 billion Bridgewater Associates LP from 2008 to 2012 and was an analyst on the investment team for the Westport, Connecticut-based firm’s $80 billion All Weather strategy. Source: Convoy Investments via Bloomberg

That’s why Convoy Investments LLC, the global macro fund he
started in November with former Bridgewater software engineer
Robert Wu, isn’t charging a performance fee to investors and
only a 1.25 percent management fee, he said. The New York-based
firm will even manage money pro bono for foundations and
underfunded pensions for up to 25 percent of the firm’s assets.

“It’s refreshingly honest,” said Simon Lack, founder of
investment firm SL Advisors and the author of The Hedge Fund
Mirage: The Illusion of Big Money and Why It’s Too Good to Be
True. “There’s some really talented people who do a good job
and earn the fees they get, but across the industry there’s a
lot of funds that charge fees they probably don’t deserve.”

Wang is betting his offer will hit a nerve with investors
who have been paying an average of 1.5 percent of assets and 18
percent of profits, according to Hedge Fund Research Inc., for
hedge funds that in aggregate have trailed the U.S. benchmark
stock index for more than five years. The $59.1 billion
Massachusetts Pension Reserves Investment Management Board has
been trying to strike a harder bargain with funds to cut fees, a
move that it estimates may yield savings of $7 million for each
$100 million invested.

Druckenmiller ‘Tragedy’

Veteran managers have also weighed in on the $2.7 trillion
marketplace. Billionaire Stan Druckenmiller, who produced annual
returns averaging 30 percent for more than two decades last year
called the industry’s results a “tragedy” and questioned why
investors pay hedge-fund fees for annual gains closer to 8
percent.

“Many hedge funds simply repackage or lever cheap
benchmark indices and sell it as expensive outperformance,”
Wang, 28, said. “While true uncorrelated active management is
more valuable than ever, investors need to make sure they are
getting what they pay for.”

Convoy explicitly structured a portion of its strategy to
contain beta exposure, or performance in line with the market,
said Wang. It currently manages internal and friends-and-family
money and is seeking to raise as much as $200 million. The fund
requires a minimum investment of $500,000, Wang said, lower than
the standard $1 million.

All Weather

Wang worked for $160 billion Bridgewater from 2008 to 2012
and was an analyst on the investment team for the Westport,
Connecticut-based firm’s $80 billion All Weather strategy. Wu,
32, worked at Bridgewater from 2007 to 2010 on the operations
team.

Wang said for the industry to keep growing fees should come
down. Managers are lured by high performance fees to take
unnecessary risk in order to gain outsized profits, a gamble
that can be particularly dangerous in a low interest-rate
environment where expected returns have decreased to about 5
percent versus as much as 10 percent.

The Convoy Funds LP, which bet on and against diversified
holdings of stocks, bonds, commodities and currencies, rose 10
percent this year through June and returned an annualized 14
percent since starting in November. The strategy aims to post
annual returns of 10 percent. Comparatively, macro managers
gained 1 percent this year through the same period and hedge
funds on average have climbed 2.5 percent, according to data
compiled by Bloomberg.

Finding Alpha

Some allocators to hedge funds, who boosted capital to an
eighth-consecutive quarterly record in the second quarter, aim
to mainly pay for alpha, or returns that exceed benchmark
indexes. Massachusetts PRIM’s campaign to cut costs in its
hedge-fund investments is paralleled by other pensions,
including the State of Wisconsin Investment Board, which
requires the system to keep at least 70 percent of a fund’s
return after subtracting factors such as beta exposure before it
pays fees.

Clients have made progress bringing fees down from what was
the long-standing norm of a 2 percent management fee plus 20
percent of profits. The structure helped make billionaires out
of top-performing managers including Dalio, Appaloosa Management
LP’s David Tepper and Paulson & Co.’s John Paulson, who were
among last year’s highest-earning investors. It’s also made some
less successful managers small fortunes.

“Investors continue to pay fees that are too high and
they’ll probably do that for a while longer,” Lack said. “Fees
should probably be more differentiated than they are.”